Question - Companion Computer Company has been purchasing carrying cases for its portable computers at a delivered cost of $68.00 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 40% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:
Direct Material $25.00
Direct Labor $32.00
Factory overhead (40% of direct labor) 12.80
Total cost per unit $69.80
If Companion Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead cost associated within the cases are expected to be 15% of the direct labor costs.
Required:
1. Prepare a differential analysis report, dated October 11, 2010 for the make or buy decision.
2. On the basis of the data presented, would it be advisable to make the carrying cases or to continue buying them? Explain.